ABSTRACTAfter 30 years of discussion and research, the academic community has established a complete theoretical system of real options and provided an excellent framework for the use of real options theory in the investment appraisal of high-tech projects. An option is an entitlement without any obligation and it has been used to describe a variety of management decisions in business investment. The description of management is effective and proper. Due to the introduction of real options theory, there has been a major breakthrough in the investment area. Project evaluation is the core content of bank credit risk assessment and business evaluation. The core content never changes from the investment evaluation framework to the credit risk evaluation framework. The project evaluation meets various needs of subject s in different ways. In this paper, the importance of real options is analyzed and the literature is reviewed. Keywords: Real Options, Literature Review, Enterprises

1. IntroductionA knowledge economy speeds the development of science and technology enterprises. There were 55 National Level High-Tech Industrial Development Districtsestablished by 2008, with a total output value break zone GDP of 1.5 trillion Yuan RMB (REN MING BI) in these districts. In China, this accounted for 5%. This is greater than 11 percentage points over the same period of the GDP. These districts created 80% of the scientific and technological achievements of the country. Zhongguancun Science and Technology Park Zone in China, for example, are the most active areas of innovation and entrepreneurship in China. There have been more than 3,000 high-tech enterprises founded and 100 or more of them produce an annual 100 million in sales revenue. A large number of the scientific and technological achievements made by these enterprises have effectively promoted technological advances and market competition. They play an important role in product innovation, industrial restructuring, employment opportunities and the rise of the regional economy. Scientific and technological enterprises develop rapidly, but financing bottlenecks become the primary ob*The research was achievements of the current stage of 2011 Beijing philosophy & Social Science research program (2011 Beijing Education Committee key project): a subtopic of study on financial development in Beijing. The research was supported in part by The China Scholarship Council (CSC) ([06]3036).

stacle restricting their development. On October 30, 2009, 28 companies were officially listed on the GEM. Relative to China’s vast scientific and technological enterprises, there is a long way to go to get their economic power to the open market and financing directly at this stage. Currently, bank loans are still the main channel of finance for technical enterprises. Large fluctuations will occur in short-run operating activities because of the great risk and uncertainty of the high-tech enterprises, so it is difficult to make a reasonable forecast of a company’s future by means of its information and project data items. These problems lead to the banks having great difficulties in making correct judgments when high-tech enterprises and high-tech projects need bank loans. It is an internal control issue in credit risk when a bank decides to accept high-risk technology companies and accept scientific and technological projects. The bank must set up a strong credit risk identification, supervision and management mechanism. Since the People's Bank provides a floating rate for a loan, banks can not offset high risk...

...REALOPTIONS:
STATE OF THE PRACTICE
by Alex Triantis,
University of Maryland, and
Adam Borison,
Applied Decision Analysis/
PricewaterhouseCoopers1
n an economic environment characterized by rapid change, great uncertainty,
and the need for flexibility, it has become increasingly important for corporate managers to use investment evaluation tools
and processes that properly account for both uncertainty and the company’s ability to react to new
information.Realoptions has emerged as an approach that addresses this challenge more successfully than traditional capital budgeting techniques.
What makes realoptions analysis so effective in the
current business climate is its explicit recognition
that future decisions designed to maximize value
will depend on new information—such as changes
in financial prices or market conditions—that will
not be available or obtained until after the initial
investment is made. It is in this sense that realoptions
resemble financial options: just as the value of a
stock option, and the investor’s decision to exercise
it, depend on the future stock price, the exercise
decision of a realoption is based on the future value
of an underlying real asset—that is, the future value
of the Investment project. The realoptions approach
thus...

...Hussein 900061146
Introduction:
Realoption analysis (ROA) is a decision-making structure that basically calculates the value of a future business decision. ROA borrows from financial options theory. A financial option gives the buyer of a financial asset the right, but not the obligation, to buy a stock or bond, for example, at a predetermined price at a future date. By analogy, a realoption is a managerial decision-making tool that calculates the value of a business decision that a manager has an option, or right, but not an obligation to fulfill.
Basically, there are two types of realoptions Growth and Flexibility. Growth options help the company to increase its future business such as in the research and development, brand development, leasing or developing land, mergers and acquisitions and most important initiating a new technology. Flexibility options are different as they give the firm the ability to change its plan in the future and adapt to a new one. For example, the company may want to buy the option to delay, expand, contract, switch uses, outsource or abandon projects.
Realoptions are considered powerful analytical tools as they capture the value of managerial flexibility to adapt decisions that would help to take an action towards any unexpected market...

...RealOptions in Telecommunication
Network Evolution Economics
John M. Charnes∗
The University of Kansas
School of Business—FEDS
1300 Sunnyside Avenue
Lawrence, KS 66045
jmc@ku.edu
Barry R. Cobb
The University of Kansas
School of Business—FEDS
1300 Sunnyside Avenue
Lawrence, KS 66045
brcobb@ku.edu
January 19, 2003
1
Introduction
This document describes ongoing work to be performed on a research project
during the period 16 September 2002 through 15 September 2003. In subsequent sections we provide background information for the project taken
from the research proposal and present some ideas that were sent recently
in a progress report to the providers of the research funds.
The goals of this research project are: (1) to provide Sprint and Nortel
Networks with a usable valuation model for making decisions related to the
evolution of the telecommunication network, and (2) to expand the existing
base of academic research related to valuation of realoptions. By using
real data and opportunities to accomplish (1), we can determine general
techniques that can be published to help accomplish (2).
This document contains preliminary results and is intended to accompany a presentation scheduled for January 24, 2003 in the Finance Seminar
at The University of Kansas School of Business. Do not quote, cite, or distribute without permission of the authors.
∗ The authors...

...Laura Martin: RealOptions and the Cable Industry
Introduction
Laura Martin, an equity research analyst for cable stocks, believes that the best way to value cable stocks is through creative methods such as realoptions and not through more traditional or typical valuation methods such as EBITDA multiples, ROIC analysis and DCF analysis. In 1999 she presented at the Credit Suisse First Boston Broadband conference, where she wanted to portray the message that realoptions is a superior valuation technique for cable stocks. She also wanted to have the opportunity to demonstrate her knowledge of the drivers of value in the cable industry.
The main reason why Laura Martin argues that realoptions is the correct method for valuing cable stocks is mainly driven by the evolution that this industry was experimenting. In this time period, cable companies were upgrading their cable infrastructure to have 750 MHz of bandwidth capacity, which left unused bandwidth capacity that could be used for other interactive services or services that didn’t exist at the moment. Laura Martin felt, and with reason, that the EBITDA multiplier and the DCF analysis did not account for this possible revenue stream which she named “Stealth Tier”. Her analyses led to a higher stock value using the realoptions method and lower values using the traditional...

...#1 – Laura Martin: RealOptions and the Cable Industry
1. Consider the multiples analysis developed in Exhibits 2,5 & 6
Please describe the method of ‘Multiples’ using case numbers and answer to the following
questions:
1.1. What assumptions does this analysis rely upon?
1.2. How is Martin’s regression analysis different from/similar to traditional multiples analysis?
1.3. Do you agree with her interpretation of the regression analysis?
2. Consider the DCF analysis presented in Exhibit 7
Please describe the method of “Discounted Cash Flows” using case numbers and answer to the
following questions:
2.1. How reasonable are Martin’s forecasts for EBITDA and her assumptions about the asset intensity
of the business?
2.2. How plausible is Martin’s terminal value multiple?
2.3. What are the tradeoffs in using multiples versus the DCF analysis?
3. Realoptions
Please describe the method of “Realoptions” using case numbers and answer to the following
questions:
3.1. What is the analogy Martin is trying to draw with options? What is the “stealth tier”? What is the
unit of analysis? In what way is the stealth tier like a call option? What is the underlying asset price?
Strike price? Volatility?
3.2. Why is Martin pushing realoptions valuation as an alternative to DCF analysis? In what ways
might the “stealth” tier...

...Business 650, Managerial Finance
Use of RealOptions Theory
Financial Management/Modeling
I
April 18, 2011nstructor:
Abstract
At a previous employment environment, the president of the corporation acted on a whim, rather than, conducting a series of testing for his expansion to go into other businesses ventures. Within a few short months, the plan was abandoned for lack of profitability. As an employee, I thought of this as a failure on the owner’s part. However, the RealOptions Theory is basically, weighing the outcome for expansion or acquisition utilizing capital investments for future ventures.
Consider RealOption theory as a method to remove some of the risk in capital investments. Helpful assistance and decision making can be derived using such charts as the Decision Tree. The decision can be extremely tiresome.
Use of RealOptions Theory in Financial Management/Modeling
Long past are the days, where a company can sit idling waiting for an idea, because while waiting someone else is making the move. The benefits that an older company may experience through experience may not fit into today’s society of technological changes. However, the risk of a company that has existed over 50 years, can they lose to new companies that evolve because of revolutionary changes in the ability to change the course of history.
Creating valuable...

...A09-05-0018
Eskandar Tooma
Aliaa I. Bassiouny
Valuation of an Increased Capacity
Project Using RealOption Analysis:
The Case of Savola Sime Egypt
“Our profits almost doubled last financial year; however, I don’t think we can expect the same increase
this year,” said Karim Reda, production manager for Savola Sime Egypt, in September 1997. “We
simply don’t have the capacity to produce more.” He was speaking to Mohamed Sallam, CFO of Savola.
Over the past month, Sallam’s office had witnessed extensive activity, with the finance department
preparing the pro forma financial statements for the following year. However, Sallam had more on his
mind. Mainly, how could Savola Sime increase its sales and profits, if it could not increase production.
Mr. Reda stated that the factories were operating at maximum capacity. He proposed that the company
seriously consider expanding the current production by increasing capacity. Sallam very energetically
said he would be on top of the matter and that he would study the proposed suggestion. The young
CFO knew that this would require a careful financial assessment of the proposed capacity increase.
From previous experience in the industry, Sallam knew that a capacity-increasing project at Savola
would cost millions of dollars. A rough estimate for such projects is that they usually cost around US
$20 million, a huge investment for a company with around US $100 million in revenues. This proposed project would...